Lexicon Pharmaceuticals Inc (LXRX) 2008 Q2 法說會逐字稿

Welcome to the Lexicon Pharmaceuticals Second Quarter 2008 Conference Call. (Operator Instructions) Please be advised that this call is being taped at Lexicon's request. At this time I'd like to introduce your host for today's call, Bobbie Faulkner, Manager of Investor and Public Relations. Please go ahead, Ms. Faulkner.

Good morning, and welcome to the Lexicon Pharmaceuticals Second Quarter 2008 Conference Call. I'm Bobbie Faulkner, and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown, Lexicon's Senior Vice President of Clinical Development; and Jim Tessmer, Lexicon's Vice President of Finance and Accounting.

We expect you have seen a copy of our earnings press release that was distributed this morning. During this call, we will review the information provided in the release, then use the remainder of our time to answer your questions. The call will begin with Dr. Sands, who will discuss our key accomplishments for the second quarter. Dr. Brown will then discuss the status of our drug development programs, and Mr. Tessmer will review our financial results for the second quarter and discuss our financial guidance for 2008. We will then open the call to your questions. For those of you who wish to view the slides to which we will refer, please access the Lexicon website at www.lexpharma.com. You will see a link on the home page under today's webcast.

Before we begin, I would like to state that we will be making forward-looking statements including statements relating to, without limitation, Lexicon's research and development of LX6171, LX1031, LX1032, LX2931, and LX4211.

This call will also contain forward-looking statements relating to Lexicon's growth and future operating results, financing arrangements, cash and investments, discovery and development of products, strategic alliances, and intellectual property. Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements including uncertainties related to our ability to enter into additional collaboration, alliances and license agreements, the success and productivity of our drug discovery efforts, the timing and results of preclinical studies and clinical trials of our drug candidates, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third parties, our dependence upon strategic alliances, and the requirements of substantial funding to conduct our research and development activities. For a list and a description of the risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission.

I will now turn the call over to Dr. Sands.

Thank you very much, Bobbie, and good morning, everyone. Welcome to our quarterly call. I'd like to begin by a brief discussion of Lexicon's emerging pipeline under the 10TO10 program, which for those of you who can see the slide, is the first slide picturing our 10 programs. In green on this slide you see our small molecule programs and their progression through clinical development, and in blue our two emerging antibody programs as well.

I think what's most exciting today and where we'll spend a lot of time discussing program LX1031 is the recent announcement, which I hope you've seen our press release pertaining to its report of the Phase 1 clinical trial results. And so we'll spend most of the time discussing those, as well as our plans to progress into Phase 2 in this program. In addition, this quarter we received Fast Track status for LX1032, another very important event for that drug program.

I'd like to mention, though, there is an emerging pipeline as well of preclinical programs that feed into our 10TO10 program. LX4211, I think, leading the pack as a future IND filing for the end of the year. And then LX710, a very exciting glaucoma program, both small molecule programs, also moving forward.

So, with that in mind, I think this call, everything you hear today needs to be interpreted in the context of promoting and moving this pipeline forward. And so we'll come back to this pipeline slide at the end of the call as well.

On the next slide, a few highlights from the most advanced clinical programs in Lexicon's portfolio. I'll just mention LX6171 briefly. It continues to progress in Phase 2 clinical trials in age-associated memory impairment, and that program remains on track. LX2931 for rheumatoid arthritis is in its multi-dose Phase 1b trial, which we initiated in May of this year. We anticipate data by the end of the year in this program as well.

And, of course, LX1031, more on that in a few moments. And LX1032, also in a multi-dose phase of Phase 1b, our Fast Track program for carcinoid syndrome. And then again, LX4211.

I think what's important here as you look at this collection of four programs in clinical development, as well as a fifth we anticipate being in by the end of the year, you see that many of our programs will have very important clinical results coming forward as we enter the second half of 2008.

And so now to focus more closely on our clinical programs, Phil Brown.

Great. Thanks very much, Arthur. It has been a strong quarter for Lexicon as we continue to progress our lead development programs. And, of course, we're preparing to bring 4211 forward into the clinic towards the end of this year.

As Arthur mentioned, we have these four programs that are advancing through our early stage development, and we have recently reported their clinical results for one of our lead programs. So, with that, let me turn to LX1031 to start with.

IBS is a very common disorder that's characterized by abdominal pain and changes in bowel function. This is a very prevalent condition, of course. It's estimated that up to 20% of the U.S. population experiences IBS, and it's one of the most common disorders that's managed by gastroenterologists and even primary care physicians.

LX1031 is our compound directed towards IBS, and it modulates an enzyme called tryptophan hydroxylase, or TPH. TPH, the target of LX1031, was identified through the Genome5000 Program here at Lexicon, and the small molecule inhibitor LX1031 was developed by our medicinal chemistry team.

Serotonin pathways in the GI tract have been associated with both the symptoms as well as the management and treatment of these symptoms in studying of IBS. LX1031 acts locally in the GI tract to influence or inhibit tryptophan hydroxylase, and this is designed to decrease peripheral serotonin levels and thereby influence and modulate the symptoms associated with IBS.

Now, on this slide, just to refresh your memory with what we originally observed in the knockout. On the left-hand portion of the slide are intestinal levels of serotonin, and you can see that there's a virtual absence of serotonin in the periphery in the knockout mouse. Now, importantly, what was also observed was a preservation of normal levels of serotonin in the brain of this knockout.

Now, if we compare the pharmacology of LX1031 in normal mice, which is depicted on the right-hand portion of this slide, what we observed was a dose-dependent decrease in peripheral serotonin, which effectively recapitulated this knockout phenotype.

These important scientific observations provide background for considering now the clinical results that we're describing today.

We've recently completed a further dose escalation evaluation of LX1031. The study design was a double-blind, multiple dose escalation study in normal volunteers, and it was conducted primarily to confirm what had been observed in prior results and continued to evaluate further dose escalation. In this study we successfully evaluated doses of 250 mg, 500 mg, 750 mg, and 1,000 mg, all of which were given four times daily over a period of 14 days.

Importantly, all of these dose levels were well tolerated and we also observed reductions in the urinary metabolite of serotonin, 5 hydroxyindoleacetic acid, or 5HIAA, at each of these dose levels.

In this next slide we depict the biomarker data from this study, and the graph depicts a change from baseline in this urinary metabolite of serotonin over this 14-day exposure period, the green line, or the pooled placebo data. Individuals which were randomized to LX1031 showed the significant decrease in urinary 5HIAA, which was consistent with what had been observed in our initial multiple dose study at the 500 mg dose level, which was given four times daily. These data confirm this overall pharmacologic activity of 1031 and strengthens our enthusiasm for the use of the compound in the setting of functional GI disorders, such as irritable bowel syndrome.

So, in summary, we've confirmed the pharmacologic activity of LX1031 in man through a reproducible effect on this urinary metabolite of serotonin. LX1031 has been extremely well tolerated over a 14-day period in all doses evaluated to date. This emerging safety profile is a very important consideration for any compound which may have utility in functional GI disorders.

Also, we had a very well behaved pharmacokinetic profile with LX1031, and that has consistently reproduced what was observed in our preclinical studies. We have extremely low levels of systemic exposure to the compound illustrating its local effect in the gastrointestinal tract, and we've seen no evidence of accumulation of a repeat dosing with the compound. We're now moving to initiate the proof-of-concept study with LX1031 in patients with irritable bowel syndrome. And, as Arthur mentioned, I hope you saw our press release on this today, and these results will also be available on our corporate website as a video presentation.

Now, shifting gears to a related program, LX1032. This compound was designed by our medicinal chemists to gain greater systemic exposure. Now, this is important because we will direct this compound towards indications where systemic serotonin levels are elevated and associated with a condition which occurs in the setting of carcinoid syndrome.

Carcinoid syndrome results from metastasis of serotonin-secreting tumors primarily to the liver, which results in a variety of symptoms including severe diarrhea, abdominal cramping, as well as other symptoms associated with the condition.

LX1032 is an oral small molecule agent that reduces serotonin production in the periphery, peripheral to the nervous system, by inhibiting TPH. This is a condition with a significant unmet medical need and at present there is only one agent that's approved for use in the setting of carcinoid syndrome, and this is an injectable agent. So, we believe 1032 offers a significant opportunity for patients with this condition.

We have completed our initial first-in-man study and are currently in the midst of conducting our multiple dose study in normal healthy volunteers. I think many of you may have seen that we obtained fast track status for this program this quarter, which really underscores the importance of exploring new approaches in managing this condition, and we're anticipating data from our multiple dose tolerance study towards the end of this year.

LX2931 is being developed in the setting of autoimmune and inflammatory conditions such as rheumatoid arthritis. The target of 2931 is S1P layse, which is an enzyme responsible for the breakdown of an important immune system signaling molecule, sphingosine-1 phosphate, or S1P. We believe this will be an important mechanism in managing the symptoms associated with many inflammatory conditions such as exist with autoimmune disorders such as rheumatoid arthritis.

Last quarter we announced completion of our single ascending dose tolerance study, where doses up to 180 mg were well tolerated. We have moved the compound forward and initiated a multiple dose tolerance study again in normal volunteers in May of this year. We're anticipating clinical results of being available from this study by year end, and this is an important study for us because we will use these results to support a drug/drug interaction study with methotrexate, which will assist in positioning the compound for evaluation in patients with rheumatoid arthritis.

For LX6171, we reported the initial target of this compound at the American Academy of Neurology meeting in April. The target of LX6171 is a brain-specific high affinity prolene transporter. We have, as many of you know and we have reported previously, initiated our Phase 2 study in age-associated memory impairment, and importantly, our accrual is on track as we had originally projected. And we are anticipating completion of this study by year end. We certainly look forward to updating you as these data become available.

I'll now turn the call over to Jim Tessmer, our Vice President of Finance.

Thank you, Phil. We issued a press release this morning detailing our second quarter financial results, which you may find on our website, if you have not already reviewed it.

Lexicon's revenues for the three months ended June 30, 2008, are $9.6 million, a decrease of 24% from $12.6 million for the corresponding period in 2007. The decrease resulted primarily from the completion in 2007 of the project funded by our awards in the Texas Enterprise Fund and the target discovery portion of our alliance with Takeda Pharmaceutical Company Ltd., and our progress towards completing the target discovery portion of the N.V. Organon alliance, offset in part by higher technology license fees.

Our second quarter revenues were primarily attributable to work in our collaborations with Bristol-Myers Squibb, Organon and Genentech, and technology license fees. For the six months ended June 30, 2008, revenues decreased 29% to $18.5 million from $26.1 million for the corresponding period in 2007.

Research and development expenses for the 2008 second quarter were $30.3 million, an increase of 19% from $25.6 million for the corresponding period in 2007. This increase is due primarily to higher preclinical and clinical costs related to the advancement of Lexicon's drug development program.

Research and development expenses for the quarter also reflected severance costs associated with reduction in personnel in May 2008. For the six months ended June 30, 2008, research and development expenses increased 10% to $58.2 million from $52.9 million for the corresponding period in 2007.

General and administrative expenses for the 2008 second quarter were $5.6 million, an increase of 12% from $5 million for the corresponding period in 2007. This increase is due primarily to severance costs associated with reduction in personnel in May.

For the six months ended June 30, 2008, general and administrative expenses increased 8% to $11.1 million from $10.3 million for the corresponding period in 2007.

Lexicon's net loss for the three months ended June 30, 2008 of $20 million, or $0.15 per share, compared to a net loss of $13.6 million, or $0.17 per share in the corresponding period in 2007. Net loss for the six months ended June 30, 2008 was $38 million, or $0.28 per share, compared to a net loss of $32.5 million, or $0.41 per share for the corresponding period in 2007.

For the three and six months ended June 30, 2008, net loss included noncash stock-based compensation expense of $1.6 million and $3.4 million, respectively. For the three and six months ended June 30, 2007, net loss included noncash stock-based compensation expense of $1.7 million and $3.2 million, respectively.

Let me turn to our cash and investments. As of June 30, 2008, Lexicon had $200.5 million in cash and investments including $26.9 million in cash and investments held by Symphony Icon that's compared to $228.8 million as of March 31, 2008 and $258.8 million as of December 31, 2007.

We continue to make progress with our investment position and auction rate securities. Since the auctions relating to our securities began to fail in mid-February, we have been able to sell $18.3 million in auction rate securities at par value and ended the quarter with approximately $59.8 million in par value of auction rate securities. Based on our assessment of fair value of these securities as of the end of the quarter, we recorded an unrealized loss of $3.2 million, reducing the value of these securities reflected on our balance sheet to $56.6 million. Our holdings of auction rate securities are reflected as long-term investments on our balance sheet.

As a reminder, our auction rate securities are AAA rated municipal securities consisting of bonds issued by various state and local municipal agencies for the purpose of financing student loans, public projects and other activities. We do not hold any collateralized mortgage-backed securities, collateralized debt obligations, or other such securities. We believe that the working capital available to Lexicon excluding the funds held in auction rate securities will be sufficient to meet our cash requirements for at least the next 12 months.

I would now like to turn to our forward-looking financial guidance for 2008. Revenue from existing contracts and agreements for 2008 attributed primarily to our collaborations with Bristol-Myers Squibb, Organon and Genentech are now projected to be in the range of $31 million to $33 million, an increase from our previous guidance of $29 million to $31 million.

Operating expenses for 2008 are now projected to be in the range of $140 million to $145 million, a decrease from our previous guidance of $145 million to $155 million, primarily as a result of our reorganization in May 2008. Noncash expenses will be approximately $14 million of this total, including $6 million in stock-based compensation, and $8 million in depreciation and amortization.

Taking into account cash received from existing contractual relationships only, we expect our 2008 net cash used in operations to be in the range of $105 million to $115 million, down from our previous guidance of $109 million to $119 million, and our 2008 capital expenditures to be approximately $3 million to $4 million.

Thank you, and now I will turn the call back to Arthur.

Thank you, Jim and Phil, and we can take questions.

Thank you. (Operator Instructions) We'll go first to Sharon Seiler with Ladenburg Thalmann.

Good morning. A couple of questions on your clinical program, but first of all with the Alzheimer's program, I think you said that you expected to complete that trial by year-end. Like the questionnaires, will we have results by year-end and will you press release those or wait to release them in a conference?

A second question would be, can you give us some detail on the trials you plan in patients for LX1031 and LX1032? And can you maybe provide some color on which programs you're looking to for additional INDs either this year or next as you build to your 10 programs by 2010?

Sharon, okay. Let's turn that over to Phil.

So, thanks for the question, Sharon. I think with regard to our Phase 2a study with 6171 in age-associated memory impairment, we are anticipating results by the end of this year. I anticipate being able to update you, the public, in general with this top line results when they become available. We'd certainly like to position them at a major medical meeting as well, and obviously we'll have to evaluate them as they become available.

With regard to how we're going to pursue our patient studies with the 103 compounds, for 1031 we've announced today that we will initiate a study in irritable bowel syndrome patients for a proof-of-concept -- as a proof-of-concept to probe the importance of this mechanism in the setting of these patients. We're still refining the details associated with that study, but as we've done with 6171, I feel that it's going to be an adequately powered or structured study in order to assess for the activity of the compound. So, we'll certainly update you as we refine the protocol for that particular proof-of-concept study.

1032, of course, is going to be positioned in patients with carcinoid syndrome. We are moving the compound through this multiple dose study in normals in order to select more rational dosing for use in patients. In other words, we believe that higher doses of the compound will be required in patients. So, we wanted to make sure we understand the pharmacokinetic safety profile before we initiate that proof-of-concept study.

And then, lastly, the additional INDs anticipated for this year, as Arthur mentioned for 4211, we're on track, we believe, at present to support a filing with that compound, which will be targeted for diabetes.

Okay, thanks. Can you just give us some sense of what you see in the pipeline after LX4211?

Sharon, it's Arthur. I think the glaucoma program is looking very interesting. It's at an important stage of now undergoing evaluation as a potential clinical candidate, and that's an international evaluation. So, that's one program of high interest. And I think the antibody programs, both 842 and 843, are also advancing, but it's still a little bit early in the year for us to forecast which one will be next.

I think at one point what's not on our typical kind of 10TO10 slide is also very important and very exciting and will likely become important in 2009 as potential clinical candidates. But we have a number of new discovery programs that I think are very important, and I think towards the end of the year we plan to have a research day during which we'll have more time to highlight the earlier stage pipeline, which is I think what your question is getting at. So, I think we'll have to defer some of this until then, when we can really go through the science of those in detail.

Okay, thank you. I'll get back in queue.

We'll go next to Jason Kantor with RBC Capital Markets.

Hi. Just some questions on the 1031 data. First of all, do you think that you need to be looking at lower doses? It seems like there is a dose response but perhaps you might want to determine more minimally effective dose? And also on the dosing you're treating four times a day. I mean, typically, pharma companies see four times a day as a nonstarter. Do you think that you can go to three times a day or two times a day given the PK or what you know now about the pharmacodynamics?

Thanks, Jason for the questions. So, the first question, I guess the way I would look at these data first off is we have an excellent safety profile emerging from even repetitive and relatively high doses of the compound. And I think that's a critical factor to consider when you're looking at IBS in particular, where the compounds that were originally approved were pulled because of safety issues. So, I think that's the current landscape of IBS is going to require an incredibly safe agent, and I'm very encouraged by the safety profile that's beginning to emerge around 1031.

I'm also encouraged by the fact that we see a virtual overlay of effect even at the lowest dose study, which was 250 mg q.i.d. in this particular study. I don't think we've adequately defined a minimally effective dose. Remember, really, what we're trying to do in Phase 1 is probe for the safety and the PK profile of the compound. I think we have the added benefit of evaluating the pharmacology by utilizing these biomarkers. But clearly we're going to have to do some dose ranging work as we move into irritable bowel syndrome.

With regard to q.i.d., or four times daily dose administration being problematic, I'm less concerned by that at this stage of development. We are working with an initial type of formulation that allows us to probe the utility of the compound. I believe there will be further opportunity if we show that the mechanism has utility in the setting of IBS to improve on this dosing regimen to make it a much more attractive pharmacologic agent clinically, or from a marketing standpoint. It's just early and we need to really probe the mechanism of action at this point.

You mentioned the formulation, are you going to have to do formulation work before starting your next clinical trial for that? And what kind of formulations might you be exploring? Also, on the 2931, you want to do drug/drug interaction studies with methotrexate. Are you going to wait until you've completed the ongoing studies, or is that something you can run in parallel?

So, we anticipate moving into IBS with 1031 with the current formulation and in order to probe for proof-of-concept with a mechanism. Assuming we were to see an effect, I think we have the opportunity to improve on the formulation of the compound as we advance it into further stage development thereafter.

With regard to 2931 and the methotrexate interaction study, we're anticipating getting that up and running after completion of this initial multi-dose tolerance study in normals. We need to assure the safety profile and the pharmacokinetic effect of the compound before we can design a protocol in a concomitant use with methotrexate.

Thank you.

We'll go next to Edward Tenthoff with Piper Jaffray.

Great. Thanks so much. Thanks for asking those questions. Touching back to 6171 for a minute, just remind me, the slides went by pretty quick. It's 120 patient, it is a two-month endpoint? And what is the cognitive endpoint that you're using? Do you think two months or that period is enough to show some sort of delta between placebo?

Thanks, Ted, I appreciate the question, and I do run through slides pretty quickly. W e had a lot to cover, so my apologies for that.

Not at all.

So, the study is a double-blind, randomized study in subjects with age-associated memory impairment. The N, as you suggested, is correct, 120, and we're exploring two dose levels, a high dose, a low dose, and a placebo arm.

So, 40 each.

That's correct. And it's a four-week exposure period. And the cognitive instruments that are being utilized are the CDR batteries, which have been utilized in our Phase 1 studies, as well as -- which is a computerized instrument. We're also utilizing paper metrics, a delayed word recall assessment, as well as subjective and objective instruments to assess for cognitive improvement in these subjects. And we believe this is an adequate period of time to probe for an effect of the compound.

Okay, good. Look forward to that. Another quick question, if I may, kind of switching over to the finances. Really, two quick questions here. Firstly, on licensing revenues, it's been around a little bit. We have actually been looking for license revenues to start to tail off in the back half. Can you just remind us what goes into the subscription fees and license revenues, what's comprising that give or take $1.3 million to $1.6 million? And how should we be forecasting that going forward?

And then my second financial question really has to do with a noncontrolling interest in Symphony, and I should know this by now considering we've worked on Symphony deals for a couple of them. But there is the $26-point-some million in cash, $27 million in cash, but I think it's $19.2 million in noncontrolling interest. And my question is, is that all that you're able to write off going forward, the $19.2 million?

Okay. Well, let me address that one first. Under current accounting literature right now this year, the noncontrolling interest, that $19.2 million, is all that we'd be able to write off. But there is new guidance out there that's effective January 1, 2009, which should enable us to actually write off all the way up to the cash amount of $26.9 million.

Okay.

The other question had to do with sublicense revenue fees.

Yes, subscription fees and licensing fees, yes.

Right. So, we did sign an additional agreement where we did bring in about $1.3 million this quarter on a sublicensing deal. As far as projecting for the future, I mean, these are trailing off. Most of these agreements, when we sign them, there's an upfront and then there aren't any additional payments. We do have a few of them that do have annual payments, but those are starting to wind down. So, when we're giving our financial guidance on revenues, all we're doing is providing the contractually committed revenue.

Right. Excellent. That's very helpful. Thanks so much.

Sure.

Thank you, Ted.

Thank you. (Operator Instructions) We'll now take a follow-up from Sharon Seiler with Ladenburg Thalmann.

Yes, I have a follow-up financial question. Can you quantify what you spent on severance costs this quarter, and do you expect to have more severance costs going forward, or are those all done already?

Sure. So, we spent about $1.9 million in severance costs in the second quarter, and that is the full amount of the expense related to this reorganization.

Okay, thank you.

Sure.

And at this time it appears that we have no further questions in the queue, so I'd like to turn the call back over to Mr. Sands for any additional or closing remarks.

Thank you very much, everyone, for participating. If you look at this last slide pictured, again, our 10TO10 program slide. As we look back on the quarter, I think the two most exciting events that we see in our clinical development front are LX1031, having progressed through its Phase 1 study and now completed them with plans to move forward. A very important event. And LX1032 receiving Fast Track status from the FDA.

Of course, there are many other things progressing in the Company as well, but in this sort of setting we can only highlight them. And we look forward to keeping you posted on the broader progress of Lexicon. So, thank you very much.

This does conclude today's teleconference. You may now disconnect, and have a great day.